I’m Professor and Chair of the Department of Economics at LIU Post in New York. I’ve published several articles in professional journals and magazines, including Barron’s, The New York Times, Japan Times, Newsday, Plain Dealer, Edge Singapore, European Management Review, Management International Review, and Journal of Risk and Insurance. I’ve have also published several books, including Collective Entrepreneurship, The Ten Golden Rules, WOM and Buzz Marketing, Business Strategy in a Semiglobal Economy, China’s Challenge: Imitation or Innovation in International Business, and New Emerging Japanese Economy: Opportunity and Strategy for World Business. I’ve traveled extensively throughout the world giving lectures and seminars for private and government organizations, including Beijing Academy of Social Science, Nagoya University, Tokyo Science University, Keimung University, University of Adelaide, Saint Gallen University, Duisburg University, University of Edinburgh, and Athens University of Economics and Business. Interests: Global markets, business, investment strategy, personal success.

Whole Foods Can Take a Lesson Or Two From Starbucks

Whole Foods MarketWhole Foods Market (NASDAQ:WFM) and StarbucksStarbucks are in different businesses — Whole Foods is in the organic grocery business while Starbucks is in the coffee business. But they share two things: First, they are popular brands among customers and investors.

Second, their businesses have been growing by leaps and bounds.

The problem with high growth companies, however, is complacency – born out of success — which can lead to strategic mistakes.

“If not checked, success has a way of covering up small failures,” writes Starbucks founder Howard Schultz in ONWARD: How Starbucks Fought for Its Life without Losing Its Soul.

Back in the early 2000s, Starbucks became complacent with the popularity of its brand, assuming that consumers around the globe could afford its high margin premium drinks in good and bad times—opening up one store after another. “We were so intent upon building more stores fast to meet each quarter’s projected sales growth that, too often, we picked bad locations or didn’t adequately train newly hired baristas,” continues Schultz.

Whole Foods salad (Photo credit: WordRidden)

As it turned out, that was a strategic mistake: By 2006, the company’s sales slow-down, a situation that was made much worse during the 2008-9 Great Recession.

Starbucks learned the hard way that not all consumers are equal in terms of income, even if they have the same preferences; and prices do matter even for the most loyal customers in harsh times.

That’s why it quickly closed unprofitable stores, focusing on innovation rather than new store opening to re-ignite growth.

The rest is history—Starbucks’ business turn around.

Now it’s Whole Foods’ turn to face the music. For years, the company has grown by opening up new stores—32 stores in 10 new markets, in 2013 alone. Fiscal year 2013 was another record-breaking year across many fronts. Here is a quote from the 2013 report: “Our sales approached $13 billion, translating to sales per gross square foot of $972. We opened 32 new stores, expanding into 10 new markets and growing our square footage 8% to 14 million. We delivered our ﬁfth consecutive year of operating margin improvement, produced over $1 billion in EBITDA, and, on a comparative 52-week basis, increased diluted earnings per share 19%. Our strong results and capital expense disciplines drove a healthy 15% return on invested capital and generated $472 million of free cash ﬂow.”

But judging from the company’s most recent earnings report, earnings and revenues may be tapering.

Most notably, same store sales have been descending in the range of 4-5%, down from the 7-8% they had been in recent years, as new stores were opened in less affluent neighborhoods (e.g., downtown Detroit) and the company’s high prices invited the competition in.

That’s why Whole Foods must take a lesson or two from Starbucks: close unprofitable stores, and focus more on innovation rather than pricing.

Post Your Comment

Post Your Reply

Forbes writers have the ability to call out member comments they find particularly interesting. Called-out comments are highlighted across the Forbes network. You'll be notified if your comment is called out.